San Francisco law to restrict HRAs to satisfy city health spending law

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San Francisco Board Supervisor David Campos sponsored new legislation that restricts the use of health reimbursement arrangements to satisfy San Francisco's health care spending law requirements.

A new San Francisco law will eliminate the appeal for employers to use health reimbursement arrangements — one of the ways employers have used to satisfy the city's health care spending law — starting next year, experts say.

Under the city's 2006 spending law, employers with 100 or more employees are required to spend $2.44 per hour per covered employee on health care this year, while employers with between 20 and 99 employees must spend $1.63 per hour. The spending requirement applies to employees working at least eight hours per week who have been employed for more than 90 days.

The overwhelming majority of employers satisfy the spending requirement by paying group health insurance premiums. However, the law offers an alternative in which employers can contribute to stand-alone HRAs, which reimburse employees for health care-related expenses.

While the federal health care reform law banned stand-alone HRAs to fund essential benefits like medical care, the law permits stand-alone HRAs to pay for health care-related expenses, such as dental and vision care. Such limited-purpose HRAs also can be used to satisfy the San Francisco spending law.

In 2011, amid reports that employers were recouping millions of dollars they contributed to HRAs that employees didn't use by year-end, the city's board of supervisors passed legislation requiring that HRA contributions be available to employees for 24 months after the contribution.

Under the latest measure, signed last month by San Francisco Mayor Edwin Lee and starting in 2015 and phased in over a three-year period, HRA contributions could no longer be counted to satisfy the spending law unless the contributions were irrevocable and could not be recovered by the employer.

In 2015, 60% of the HRA contributions would have to be irrevocable in order for the contributions to count toward the city spending law, with the irrevocable requirement rising to 80% in 2016, and to 100% in 2017 and succeeding years.

San Francisco Board Supervisor David Campos, the sponsor of the legislation, in a statement described the previous lack of irrevocability as a “loophole” that his legislation closes.

But employer groups view the new law differently.

HRAs were a “great tool” for complying with the spending statute, said Gwyneth Borden, executive director of Golden Gate Restaurant Association in San Francisco.

Employers particularly affected by the new law will be those with lots of part-time employees who are not offered group health care plan coverage, said Andy Anderson, a partner with Morgan, Lewis & Bockius L.L.P. in Chicago.

The federal health care reform law only requires employers to offer coverage to full-time employees, which the law defines as employees working an average of 30 hours a week, in contrast to the San Francisco law, which applies to employees working as little as eight hours a week.

For such employers, the HRA approach — to satisfy the spending requirement — was more attractive than simply writing a check to the city with no possibility of recovering unused funds, said Amy Bergner, a managing director with PricewaterhouseCoopers L.L.P. in Washington.

More employers now, however, will turn to that option, said Rich Stover, a principal with Buck Consultants L.L.C. in Secaucus, N.J.